Written Testimony of David H. Stevens Assistant Secretary for Housing / Federal Housing Administration Commissioner U.S. Department of Housing and Urban Development
"The Recently Announced FHA Refinance Option for Underwater Borrowers and Revisions to the Home Affordable Modification Program (HAMP)"
Hearing before the Subcommittee on Housing and Community Opportunity U.S. House Committee on Financial Services
April 14, 2010
Chairwoman Waters, Ranking Member Capito and members of the Subcommittee, thank you for the opportunity to testify today on the recently announced adjustments to Federal Housing Administration (FHA) programs that will permit lenders to provide additional refinancing options to homeowners who owe more than their home is worth because of large falls in home prices in their local markets.
These adjustments will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans as long as the borrower is current on the mortgage and the lender reduces the amount owed on the original loan by at least 10 percent. A second lien writedown program will be paired with these changes to encourage further writedown of second liens to further assist homeowners reduce the amount of negative equity they have in their homes. These program adjustments will better assist responsible homeowners who have been affected by the economic crisis. The program modifications will expand flexibility for investors, mortgage servicers and originators to assist more people who owe more on their mortgage than their home is worth because their local markets saw large declines in home values.
These changes, in addition to changes to the Home Affordable Modification Program (HAMP), will help the Administration meet its goal of stabilizing housing markets by offering a second chance to up to three to four million struggling homeowners through the end of 2012. Costs will be shared between the private sector and the Federal Government; funding from the Troubled Asset Relief Program (TARP) will not exceed the $50 billion originally allocated for housing programs.
Housing Policy Overview
The Administration s goal is to promote stability for both the housing market and homeowners. To meet these objectives, the Administration has developed a comprehensive approach using state and local housing agency initiatives, tax credits for homebuyers, neighborhood stabilization and community development programs, mortgage modifications and refinancing, and support for Fannie Mae and Freddie Mac. With the record-low mortgage rates seen this past year and, thanks in large part to these programs, more than four million homeowners have refinanced their mortgages to more affordable levels helping to save more than $7 billion in the past year; more than one million are saving an average of around $500 per month through the Administration's modification program; home equity (wealth for homeowners) increased by more than $13,000 for the average homeowner in the last three quarters of 2009; and the economy is growing.
Even with this success, we continue to see challenges. Servicers were slow to implement HAMP, resulting in a slow start for the program. Recent improvements in the program have accelerated the pace of modifications. But our strategy to address the crisis must evolve because our challenges have also evolved. The enhancements announced on March 26, 2010 are responsive to the changing needs of homeowners across the country.
Our housing initiatives must balance the need to help responsible homeowners struggling to stay in their homes, with the recognition that we cannot and should not help everyone. The President has said: "We can t stop every foreclosure." And in fact, we can t maintain this balance if we try to assist every borrower. For example, investors and speculators should not be protected under our efforts, nor should Americans living in million dollar homes or defaulters on vacation homes. Some people simply will not be able to afford to stay in their homes because they bought more than they could afford. Instead, the Administration must focus on providing responsible homeowners opportunities to obtain a modification or to refinance and prevent avoidable foreclosures and, when necessary, facilitate the transition to a more sustainable housing situation. The newly announced adjustments are tailored to accomplish these goals by helping a targeted group of borrowers.
The new Federal Housing Administration (FHA) refinance option will provide more opportunities for lenders to restructure loans for some families who owe more than their home is worth. This should help to create stabilizing incentives in the housing market. This is a voluntary program for lenders. To be eligible for refinancing through FHA, borrowers must be current on their mortgage..
Eligible homeowners for the new FHA refinance option must, for example live in an owner-occupied principal residence and have a mortgage balance less than $729,750. As I will describe at greater length later in this testimony, their lenders must agree to write down the balance on their underwater loan to a sustainable level, and their new monthly mortgage payments must be affordable (not greater than 31 percent of their income). This new option, and the new flexibilities for HAMP program, will enable us to more effectively reach this target population.
Taken together, the Administration s broad housing initiatives and the newly announced flexibilities will offer a second chance to millions of responsible, middle-class American families struggling to stay in their homes and will help stabilize our households, neighborhoods and communities.
Background on Housing Program Initiatives to Date
The Administration has taken a broad set of actions to stabilize the housing market for the benefit of American homeowners. These efforts are having an impact on our housing markets - we are seeing signs of stabilization. Just over one year ago, stress in the financial system had severely reduced the supply of mortgage credit, limiting the ability of Americans to buy homes or refinance mortgages. Millions of responsible families who had made their monthly payments and fulfilled their obligations saw their property values fall, and found they were unable to refinance at lower mortgage rates.
In February 2009, less than one month after taking office, President Obama announced the Homeowner Affordability and Stability Plan. As part of this plan and through other initiatives, the following actions have been taken to strengthen the housing market:
Actions Supporting Market Stability and Access to Affordable Mortgage Credit
- The Administration has provided strong support to Fannie Mae and Freddie Mac to ensure continued access to affordable mortgage credit across the market;
- Together, Treasury and the Federal Reserve have purchased more than $1.4 trillion in agency mortgage backed securities, which helped keep mortgage rates at historic lows, allowing homeowners to access credit to purchase new homes and refinance into more affordable monthly payments; and
- The FHA and Ginnie Mae have played an important counter-cyclical role, providing liquidity for housing purchases and refinancing at a time when private lending has declined.
Actions Helping Homeowners Purchase Homes, Refinance and Modify Mortgages to More Affordable Payments, Prevent Foreclosures and Stabilize Communities
The Administration has:
- Launched a modification initiative to help homeowners reduce mortgage payments to affordable levels and to prevent avoidable foreclosures. Homeowners in active modifications are saving around $500 per month on average;
- Supported temporarily expanding the limits for loans guaranteed by Fannie Mae, Freddie Mac, and FHA from previous limits up to $625,500 per loan to $729,750 to provide needed support to keep markets functioning during this crisis;
- Expanded refinancing flexibilities for the Fannie Mae and Freddie Mac loans, particularly for borrowers with negative equity.
- Combined with historically low mortgage rates, this has helped more than four million American homeowners to refinance, saving an estimated $150 per month on average and more than $7 billion in the past year;
- Launched a $23.5 billion Housing Finance Agencies Initiative which is helping more than 90 state and local housing finance agencies (HFAs) across 49 states provide sustainable homeownership and rental resources for American families;
- Supported the First-Time Homebuyer Tax Credit, and the subsequent extension and expansion of the credit to also assist move-up buyers, which has helped hundreds of thousands of responsible Americans purchase homes;
- Through the Recovery Act, the Administration is providing over $5 billion in support for affordable rental housing through low-income housing tax credit programs and $2 billion in additional support for the Neighborhood Stabilization Program (NSP), on top of the first round of $4 billion of NSP funds, to restore neighborhoods hardest-hit by concentrated foreclosures; and
- On February 19, 2010, the Administration announced the $1.5 billion HFA Hardest-Hit Fund for five state HFAs in the nation s hardest-hit housing markets to design innovative, locally targeted foreclosure prevention programs. On March 29, 2010, we announced a $600 million expansion of that program for an additional five HFAs.
HAMP has provided more than one million struggling homeowners a second chance to stay in their homes, with each homeowner in a modification saving around $500 per month on average. Often overlooked, an additional 650,000 families experiencing financial difficulty were assisted through FHA s variety of loss mitigation options since the beginning of FY 2009.
Together, these initiatives are having an impact – strengthening the housing market, helping responsible homeowners prevent avoidable foreclosures and rebuilding communities and neighborhoods. Today mortgage rates remain near historic lows – the primary interest rate is now about 5.20 percent. We are also seeing encouraging signs in housing indicators – home prices and the pace of home sales have stabilized in recent months.
The Challenge of Underwater Homeowners
An estimated 11 to 15 million mortgages, or approximately one-fourth of outstanding mortgages, are for amounts that exceed the value of the underlying home. However, it is important to put this number into context as this includes owner-occupied homes as well as mortgages on second homes and investment properties. While it is difficult to estimate the precise percentage of underwater mortgages that are on owner-occupied homes, it is important to note that the Administration s efforts are specifically targeted to assisting borrowers to remain in their primary residence. As stated earlier in this testimony and elsewhere, the President and the Administration has repeatedly said that we cannot and should not stop every foreclosure. The recently announced program enhancements to FHA and HAMP that we are discussing today are available only for mortgages on owner-occupied homes.
Many such homeowners now find themselves owing more on their home than its current market value. Many of these homeowners are underwater due to sharp price declines in their local housing markets due to no fault of their own – some happened to buy at the peak of the boom, while others have suffered from the impact of foreclosures on properties in their neighborhoods. In many cases, neighbors lost their jobs or suffered other types of financial distress, leading to resale at much lower prices, sharply lowering the market value of the other homes in the neighborhood. Underwater homeowners are often facing unaffordable monthly payments, putting them at an increased risk of default, which would lead to further destabilization of the housing market and the local economy. Facilitating principal writedowns for homeowners who are now in mortgages that place them dangerously close to default will enable them to restructure their debt, refinancing into more sustainable loans. By lowering their risk of default, these efforts will also improve prospects for their neighbors by lowering the likelihood that the local housing market will suffer from more foreclosures.
It is also important to note that the majority of underwater homeowners are still current on their mortgage. While many underwater borrowers are at imminent risk of foreclosure, the majority of underwater borrowers are still making their monthly mortgage payments. Of the 11 to 15 million mortgages that are estimated to be underwater, a far smaller number of families are at imminent risk of losing their homes to foreclosure. The Administration is keenly aware of the potential for moral hazard in principal reduction and has carefully designed the guidelines of the principal writedown enhancements to FHA and HAMP to discourage borrowers from purposefully becoming delinquent on their loan, otherwise known as strategically defaulting, solely to receive a principal writedown. To this end, borrowers are required to be current on their existing loan to be eligible to refinance into a FHA-insured mortgage.
FHA Refinance Option
To address the challenge of underwater homeowners, we have made adjustments to Federal Housing Administration (FHA) programs that will permit lenders to provide additional refinancing options to homeowners who owe more than their home is worth because of large falls in home prices in their local markets. These adjustments will provide more opportunities for qualifying mortgage loans to be responsibly restructured and refinanced into FHA loans as long as the borrower is current on the mortgage and the lender reduces the amount owed on the original loan by at least 10 percent.
The new FHA loan must have a balance less than the current value of the home, and total mortgage debt for the borrower after the refinancing, including both first and any other mortgages, cannot be greater than 115 percent of the current value of the home - giving homeowners a path to regain equity in their homes and an affordable monthly payment. By requiring a meaningful principal write-down in conjunction with the newly refinanced loan, borrowers will have a more sustainable loan that will be more affordable. Additionally, borrowers will have an opportunity to refinance into current interest rates, which remain low.
This refinancing will help homeowners by setting monthly payments at affordable levels and decreasing the mortgage burden for families owing significantly more than their homes are worth. Keeping more responsible families in their homes should support the continued recovery of the housing market.
Rationale for Expanded Efforts to Encourage Principal Writedowns
As the housing crisis has evolved, so have the challenges - negative equity is an important cause of foreclosures, along with affordability and unemployment. As such, facilitating principal writedowns by private investors and lenders is an additional tool that will be useful to stem the tide of foreclosures.
Many analysts have identified a strong correlation between loan-to-value ratios of homeowners and the likelihood that they will default. In many cases, providing a principal writedown to a borrower is more economically rational for an investor or lender than not doing so, as lenders lose significant value when a home goes to foreclosure. Many first-lien investors and analysts of loan defaults have shown that providing principal writedowns for loans that are more than 20% underwater significantly improves loan performance and reduces the potential for those loans to default. As a result, the cost of providing the principal writedown, which is borne by the private sector, is lower than the eventual loss if the loan were to default and the home go to foreclosure. The FHA refinance option provides a vehicle for many investors and lenders to reduce their expected losses while also providing responsible borrowers with meaningful debt relief and better enabling them to afford to remain in their home.
The FHA refinance option is voluntary and both homeowners and investors must agree to the transaction. Early in the housing crisis, principal writedowns were limited, due in part to uncertainty about where house prices would stabilize. Now that housing prices have been more stable for an extended period, lenders can make more accurate calculations about the expected returns from principal writedowns. In this new phase of recovering from the housing crisis, principal reduction should offer an important additional path to interest rate reductions or forbearance to effectively prevent foreclosure - even when the different approaches might result in the same monthly payment for the homeowner. In short, providing homeowners with a path to positive equity can be a very helpful factor to prevent loan defaults.
Options are Designed to Alleviate Obstacles to Market Coordination and Built To Leverage Existing Market Incentives and Mortgage Finance Infrastructure
The vast majority of the burden of writing down these loans will fall where it belongs, on the lenders and investors, not on the taxpayer. As mentioned earlier, the private sector has increasingly recognized that a principal writedown can be an economically rational alternative to a foreclosure to preserve value in their mortgage holdings. The adjustments to the FHA refinance program and HAMP support the efforts already underway in the market and offer incentives to expand their reach to loans in which the servicer of the loan may differ from the investor and to overcome obstacles to market coordination, including the presence of a second lien and stresses on the capacity of servicers to perform modifications.